Posts Tagged ‘Offshore Outsourcing’

Offshoring to distant locationsInsource (or keeping the work at home)Nearshoring (a compromise solution)—this model is increasingly offering a more competitive and attractive alternative to the other two offshoring models.

Nearshoring is simply “outsourcing” or offshoring to an offshore location that is much closer to home. In other words, rather than a USA based company outsourcing work to a provider or shared services operation located in India or the Philippines, nearshoring would be the same company outsourcing the work to a provider or shared services operation located somewhere in Latin America or Canada.

The Benefits of Proximity. The key benefits provided by nearshoring are all related to the proximity of the nearshore destination to the home country and these potential benefits may include:

1. Cultural Proximity inevitably brings cultural and linguistic similarities. The USA for example, has a huge Spanish speaking community and many Latin Americans have relatives in the USA. Hence, it makes sense to nearshore work, especially contact center work for the Spanish speaking community, to a location south of the border.

2. Economic Proximity and historical ties also lead to close economic ties. The rise of free trade agreements such as NAFTA (which was originally created to benefit the agricultural and manufacturing sectors) inevitably bring the same benefits to companies who decide to nearshore a portion of their work to countries covered by such agreements. Furthermore, nearshoring inevitably leads to an indirect increase in trade and business in general between the source and destination countries; thus, a win-win situation for all.

3. Political Close economic ties may also be followed by close political ties. The European Union (EU) is both an economic and a political union and hence, companies in Western European countries who nearshore to locations in Central or Eastern Europe will find familiar regulatory regimes along with friendly political environments in which to operate in. Moreover, both the EU and NAFTA offer flexible visa and other arrangements for professionals from member countries to move across borders for long periods of time. Furthermore, with intellectual property (IP) protection increasingly a critical concern, nearshoring to an EU or NAFTA member country is generally less risky as these countries have strong IP protection measures in place and these measures are generally enforced.

4. Geographic Proximity will likely mean being only a few time zones away. Hence, this will make the critical interaction necessary between all the parties involved all the more easier (and no 3 a.m. meetings).

5. Cost Furthermore, less distance means that face to face interaction is less expensive and time consuming as time is not wasted traveling from the home country to the offshore location. This inevitably leads to more face to face interaction between all critical parties necessary to make an outsourcing arrangement viable. Likewise, the inevitably additional costs (sometimes, as in the case of the Philippines, mandated by law) associated with hiring workers to work night shifts or odd hours is largely eliminated.

With the economy coming off of its lowest point since the great depression and CIOs being under extreme pressure to reduce cost and increase their return on investment for every project they undertake, many are asking the question of whether executing IT activities under a third party model makes sense for their organization. The answer to this question is quite complex especially when considering the third party’s experience in outsourcing, offshoring or insourcing. Allow me to first define the options that are available to most organizations.

1. Offshoring refers to sending both knowledge-based IT work (i.e. most often application development and maintenance) to third-party firms in other nations. The intent is to take advantage of lower wages and operating costs in such nations as China, India, Hungary, and the Philippines as examples. The choice of a nation for offshore work may be influenced by factors such as the language and education of the local workforce, transportation systems or natural resources. For example, China and India are graduating high numbers of skilled technicians, engineers and scientists from their universities. In addition, some nations are noted for large numbers of workers skilled in the English language, such as the Philippines and India.

2. Outsourcingcan be defined as the hiring of an outside company to perform a task that would otherwise be performed internally by a company (this can be done on an offshoring, local, or combined basis)–generally with the goal of lowering costs and/or streamlining workflow. Outsourcing contracts are often several years in length. Companies that hire outsourced services providers often do so because they prefer to focus on their core strengths while sending more routine tasks outside for others to perform. Typical outsourced services include the operation of human resources departments, telephone call centers, distribution centers, research needs, computer departments or services and design.

3. Insourcing refers to situations where an outsourced services provider moves into and sets up shop in or near a client company’s facility. It is common for major companies to sign agreements with IBM Global Services, HP, Perot Systems and other outsourcing firms whereby these firms take over and operate a client’s internal IT department. Coming up next (post): Discussion of the pro and cons of each option.

India is the global leader in IT outsourcing, but more companies are outsourcing to China to reduce overall IT spend. Inflationary pressures and the increase in wages have caused companies to look at other places for cost effective alternatives.

Most Global IT Outsourcers (e.g. IBM , Infosys, HP, Cognizant) are recognizing the importance of creating a development centers in China which will service non-Chinese companies. Roughly 30% of the capacities of these companies are dedicated to internal Chinese companies, the remaining 70% is dedicated to US and European companies.

It is becoming more common to see development work spread across geographic areas (i.e. China and India) as a way to increase productivity within the development groups.

India is about 10 years ahead of China in terms of cultural awareness as it pertains to IT Outsourcing, but China is closing the gap a pace that is far faster than the time frame that India took to reach the same place.

There are still some obstacles associated with the infrastructure within china but “technology zones” and government sponsorship appear to be breaking down these barriers.

India still dominates in the area of Call Center outsourcing and has invested a significant amount of GDP on linguistic training for its population.

Keys to Outsourcing Success are Communication, Communication, and Communication! This is especially relevant in the areas of offshore outsourcing.